When Starting a Small Business to Pay Off Debt is Risky

Hey there! I wanted to have a real talk with you about starting a small business when you have a lot of personal debt. I know it can be tempting to want to be your own boss and make more money to pay off your debts faster. But there are some big risks you need to think about before taking the plunge.

I’ve been where you are. When I graduated college, I had a mountain of student loan debt and some credit card balances from my less-responsible days. All I could think about was getting out from under that debt as fast as I could. So I came up with a business idea that seemed like a sure thing – I was so excited!

But let me tell you, it didn’t go well at all. I made some classic mistakes that put me in an even worse financial hole than when I started. If I could go back in time and talk to my younger self, here’s the advice I would give:

Don’t invest money you don’t have

It’s so tempting to put expenses on credit cards when you’re starting a business. After all, you need equipment, inventory, marketing materials, etc. And you’re sure you’ll make that money back and then some once things get going, right? Maybe, but it’s a huge risk.

I put about $20,000 on credit cards to start my business – yikes. When things didn’t take off as fast as I thought, I couldn’t keep up with the payments. My credit score tanked and interest charges ate me alive.

If you can bootstrap your startup with cash savings, that’s ideal. If you need a loan, explore options through the SBA that are designed for entrepreneurs. And only spend what you absolutely must to get started. Patience and frugality are key!

Have a backup plan

When I started my business, I was so sure it would replace my full-time job income quickly. So I up and quit my job! I told myself I could always get another one if I needed to. But after a few months of low sales, I was panicking.

It’s much safer to start your business as a side hustle and keep your day job. That way you still have steady income to cover your bills. Once your business is thriving and able to support you, then you can transition to full-time entrepreneur.

Don’t take on more debt

This was another big mistake I made. I thought if I took out a business loan or line of credit, I could invest that money into growth and pay it off easily later. But all it did was dig me deeper into debt when the growth didn’t happen.

Avoid the temptation to take on more debt, even if it seems like it will help your business. Find ways to improve and expand that don’t require borrowing. And if the business isn’t successful enough to be self-sustaining, it may be time to rethink your plans.

Have realistic expectations

I thought my business would be profitable almost right away. When that didn’t happen, I felt like a failure. The truth is, it takes time to build a customer base and refine your offering. Very few businesses are overnight successes.

Be conservative in your projections, especially in the first couple years. Expect it to take time to become established. And be prepared that you may need to pivot your original idea based on what the market responds to.

Protect your personal finances

This is so important. When I started my business, I didn’t separate my personal and business finances at all. I used my personal credit cards and checking account for everything. Before I knew it, I had no idea what money was for the business or for my personal life.

Set up a business checking account and credit card right away. Never co-mingle money. Make sure you pay yourself a regular salary or owner’s draw. And consult with a tax professional – you’ll likely need to form an LLC or corporation to protect your personal assets.

I hope this helps provide some guidance from lessons I learned the hard way! The bottom line is proceeding with caution if you want to start a business while in debt. It’s not impossible, but it takes realistic planning, discipline, and accepting it will take time to succeed. Wishing you all the best! Let me know if you have any other questions.